ELSS is the only investment which can help you create wealth along with a reduction in the tax outgo
When you are thinking of building wealth, you start to chase returns rather than saving and investing regularly. Wealth creation is a concept that not only incorporates investment advice but also structuring, taxation, insurance, and cash flow management as all these are underpinned by financial goals.
Most investors commit the mistake of investing for wealth creation and tax saving separately. Tax planning needs to look like an important part of overall financial planning and should not be addressed in isolation.
Keeping aside the goal of saving tax throughout the year makes us end up committing mistakes that may have implications on our long term financial failure. Another reason for this can be the complexity and diversity in the availability of tax saving investment options right from life insurance products, home loans, and equity-related investments to fixed income tax saving instruments like FD, PPF, and post office investment schemes. Selection of the right instrument for tax saving becomes easy and meaningful when it is aligned with specified financial goals. For example, when people think of building a corpus for their retirement, the first thing that comes to their mind is the corpus being built by their contribution to provident fund, wherein they possibly try to add voluntary contribution over and above the limits mandated by law. The reason behind this is high interest on PF, tax-free nature but with the current changes proposed in the Union Budget 2021. The interest earned will be taxable if the annual contribution is Rs 2.5 lakh and above - this makes people think about compensating the interest eaten through tax-free income earned in other avenues available.
For an investor, the purpose of selecting an instrument should be clear, e.g. insurance should not be mixed with investment. The investment should be aligned with medium to long-term goals as these goals generally require a large corpus to achieve. The investment aligned with these goals, given the time, gives the benefit of compounding, so ultimately we allow our investment to play a dual role.
Since we always look for earning the maximum return possible from the investments that we make, the same should be expected from the investments that we make to save tax. In order to follow the path, we need to push ourselves to think of investing beyond the traditional ways of saving tax by investing in fixed income tax saving instruments like FD, PPF, or endowment life insurance plans. There are some endowment life insurance plans which provide guaranteed returns to match it with bank FD and other traditional tax saving options. The increase in FDI limit up to 74 per cent for insurance companies as proposed in the budget 2021 will make these companies introduce more lucrative saving options to make it tough for the other existing avenues.
These options are good for saving tax but they somehow lack in serving the purpose of wealth creation at the same time as they offer fixed but lower returns when compared to other options available like equity-linked saving schemes. ELSS also has an edge over other tax saving instruments available in the market in terms of lock-in period and average returns generated while investing for the medium to long term. Another investment option that can match returns outcome in line with ELSS is Unit linked insurance plans. However, the recent proposal in the Union Budget 2021 that states that the maturity proceeds from ULIP will attract tax if the premium amount is over and above Rs 2.5 lakh. This makes ELSS the only investment which can help you create wealth along with a reduction in the tax outgo at the same time.
The author is Senior Vice President, Master Capital Services.
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